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Xavier Lambin, TSE Print
Friday, 09 December 2016, 12:15 - 13:15

ENTER Seminar

Xavier Lambin, Toulouse School of Economics

Mothballing as a Predatory Strategy: a real Options Approach

Abstract: The deregulation of the electricity sector in Europe since the early 1990s led to new challenges. In particular, investors are increasingly exposed to risk. As the times of fast demand growth now seem to be over, mothballing is an option of increasing interest. Even though mothballing {the possibility of a producing facility being temporarily withdrawn from generation{ provides a hedging against risk, it may also be a way to deter entry, and it may be used to artificially increase prices on the spot market, two strategies regulators are fighting against. On top of that I argue that mothballing can also be a strategy to avoid losing the war of attrition of a standard exit game, by decreasing the value of rivals and driving them to exit earlier than if the plant was retired. I study this phenomenon through the lens of a simple real-options game-theoretic model that describes and quantifies the effects of mothballing. 

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